The Disadvantages Of Reverse Mortgage
A reverse mortgage can be an attractive option for many home-owning seniors that are having a difficult time making ends meet
. With a reverse mortgage, a senior homeowner will receive money for their home equity from a lender not having to make repayments for as long as they live in their house. So with the right reverse mortgage, a senior homeowner can maintain their standard of living whilst retaining ownership of their home.
This obviously, is the image that all the reverse mortgage companies attempt to paint for prospective borrowers. Nevertheless, there are lots of differences that have to be understood between reverse mortgage's and conventional loans. If these differences aren't comprehended, they can bring about financial problems for reverse mortgage borrowers.
Disadvantages of Reverse Mortgages.
The first drawback is the relative cost of a reverse mortgage. Reverse mortgages tend to be very expensive when compared with a conventional mortgage. This is due to the rising-debt nature of reverse mortgages. For instance, a standard reverse mortgage might give a homeowner with a $300 per month payment with an annual interest rate of 12 percent compounded monthly. Over the course of 10 years, the homeowner will obtain $36,000 in payments, but will owe nearly $70,000-almosttwice as much as received.
The second drawback is the complex and confusing contracts of reverse mortgages, which could have a great impact on the overall cost of a reverse mortgage to the borrower. The complexity of the contracts often permit lenders and third parties associated with arranging reverse mortgages to not totally disclose the loan's terms or fees. These numerous other front-end and/or back-end fees can also speedily increase the cost of a reverse mortgage. These fees can consist of origination fees, points, mortgage insurance premiums, closing costs, servicing fees, shared equity and shared appreciation fees.
Out of all these fees, the shared equity and shared appreciation fees should be prevented, as they can rapidly raise the cost of the mortgage without giving any benefit to the borrowers. As an example, a shared appreciation fee can give a lender an automatic 50% interest in the difference between the present value of the home as soon as the loan is signed and the appreciated value of the home when the loan is terminated. What makes the fees unjust is the fees have no relation to the amount that's borrowed.
The third disadvantage is the reverse mortgage payments can affect eligibility for old age pensions, Medicaid, or supplemental Social Security income. Seniors may not even fully grasp this issue until after they already have their reverse mortgage, and only then do they find out that this can have the reverse effect on a seniors finances then what they were attempting to accomplish in the beginning by taking out the reverse mortgage.
Another disadvantage is the point that reverse mortgages decrease the value of a senior's assets and estate. This will have an effect on the amount of inheritance received by the borrower's heirs.
How to prevent these hazards
The easiest way for a senior to avoid these hazards is to be careful when selecting a lender, by acquiring bids from three separate lenders. They ought to take these contracts to a reverse mortgage counselor for evaluation. This will permit them to accurately evaluate the 3 contracts prior to deciding on best one for their cases.
by: Hazel Knox.
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